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HomeMy WebLinkAbout2000-08-15; City Council; 15874; Annual Report of Investment Portfolio4B# 4879 UITG. 8-6-oC DEPT. TRS ( BQ, i IO i.-- \ CITY OF CARLSBAD -AGENDA BILL TITLE: ANNUAL REPORT OF INVESTMENT PORTFOLIO DEPT. “+g $l CINATTY: - CITY MGR: RECOMMENDED ACTION: Accept and file report. ITEM EXPLANATION: City Policy requires the City Treasurer to render an annual report of the City’s investment portfolio. This report is for the fiscal year ended June 30, 2000 (FY99-00). Assets in the investment portfolio totaled $323 million at the end of the fiscal year. This is the highest amount ever for the portfolio and represents an increase of $24 million from the previous fiscal year. Cash and investments now comprise an estimated 52% of the total assets reported by the City and its agencies. It is estimated that the investment portfolio will increase to $360 million by the end of FYOO-01. For the last month of the fiscal year, the portfolio had a return of 6.1%. For the entire fiscal year, however, the portfolio averaged 5.8%. Cash interest income totaled $17 million in FY99-00 of which approximately $2.2 million went to the General fund. For the next fiscal year (FYOO-01) it is expected that the average return for the portfolio will approximate 6.0%. EXHIBITS: 1. City Treasurer’s Annual Report of Investment Portfolio for the fiscal year ended June 30, 2000. CITY TREASURER ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR THE FISCAL YEAR ENDED JUNE 30,200O CASH MANAGEMENT AND INVESTMENT PROGRAM The City Treasurer is charged with the design of an effective cash management and investment program consistent with the California Government Code, the Carlsbad Municipal Code, and the Carlsbad Investment Policy. Among other activities, this includes arranging for banking services; forecasting all cash receipts and expenditures; investing all inactive cash; and reporting all investment activities. Accurate cash forecasts are the bases for optimizing interest revenues. This ranges from developing a cash budget for the fiscal year to the daily monitoring of individual deposits and checks as the bank enters them. With on-line access to the bank’s computer, the City Treasurer attempts to predict daily the account activity and its ending balance. Only sufficient cash is kept in the bank in order to cover uncollected funds and checks that are expected to clear the account that day. If it is beneficial to the City, compensating balances may be kept in the account to offset bank service charges. It is only after this detailed process that cash available for investment can be identified. Forecasts of interest rates for up to five years are then made to determine how far on the yield curve investments could or should be made. All inactive cash is then promptly invested to achieve the goals stipulated in the City’s Investment Policy: safety of principal, sufficiency of liquidity, and maximum yield. A buy and hold investment policy is generally followed to ensure greater safety of principal. Through a staggering of investment maturity dates, the portfolio is designed to ensure liquidity and achieve an average market yield through the economic cycle. The investment portfolio is a pool of assets representing inactive cash from the various funds of the City and all of its agencies, including the City of Carlsbad, the Carlsbad Redevelopment Agency; and the Carlsbad Water District. Cash received into the pool is invested without regard to the agency and the fund from which it originated. Accounts are maintained, however, that identify the cash contributed and the interest earned by each agency and fund involved. This report summarizes and analyzes the activities of the investment portfolio for the fiscal year ended June 30, 2000 (FY99-00). Amount of assets, yields achieved, and cash incomes are presented. To give perspective to these measurements, movements in market interest rates are provided, and comparisons are made with the preceding four fiscal years. Finally, a statement is offered regarding the prospects for the fiscal year commencing July 1, 2000. 1 2 FY99-00 MARKET REVIEW Federal Funds Target Rate Adjustment Dates 6.75% 6.56% 6.25% 6.66% 5.75% 5.50% 5.25% 5.00% 4.75% 4.50% ] 5.2k--,o , “or- 4 4.75% I Federal funds rate is a key money market rate that correlates with rates on other short- term credit arrangements. It is the interest rate that banks charge each other for overnight loans. The federal funds rate was increased 25 basis points to 5.00% on June 30, 1999, the last day of FY98-99. During FY99-00 The Federal Reserve then proceeded to increase federal funds rate five times for a total of 150 basis points (1.5%). The federal funds rate ended the fiscal year at 6.50% on June 30,.2000. Short-term interest rates increased during the first half of the fiscal year, reflecting the actions of the Federal Reserve. In the second half of the fiscal year, two-year rates exceeded five-year rates. The fiscal year ended with virtually no spread between one- year and five-year rates. The yield curve was inverted at the end of the fiscal year. SHORT-TERM INTEREST RATES U.S. Treasury Instruments Fiscal Year 1999 - 2000 Ipercent 5.25 1 . * .* 5.00 $ - - ---A- , I I I I I I JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 5.769 5.670 5.7565.975 6.126 6342 6.6115 6.601 6,320 6540 6517 6.179 5617 5.7% 5.6005816 6.0111 W.35 6561 63 6,483 6.67l6.667 63SS 5.103 5377 S.1785436 5.679 5862 6.236 6.226 6.239 6.153 6.156 6.062 3 6/30/99, 12/31/99, 6/30/00 the difference between short-term and longer- lRrmtl term interest rates of U.S. 6.5K Treasury instruments on a 6.25 +-..- ---dC--. -,..‘Ld C- -*.C.. given day. Financial 6.00 --.“_ - - - - 5.75 I’ ; ’ r analysts use it to assess 5.59 f’ c the markets expectation 5.25 -fl of inflation. The normal 5.00 475 -A shape of the yield curve is 4507 I I I t an upward slope, with 3Mth 1 Yr 2Yr 5Yr IOYr short-term rates lower than longer-term rates. That was the case at the beginning of FY99-00. - However, at the end FY99-00, short-term rates were greater than longer-term rates, producing an inverted yield curve. Historically, an inverted yield curve has usually preceded a recession. At the close of the fiscal year, the market did not indicate that any further action was needed by the Federal Reserve to curb incipient inflation. The yield curve is a graphic presentation of On a broader perspective, average short-term interest rates increased in the last fiscal year. This reversed a downward trend of the previous two years. COMPARATIVE INTEREST RATES * One, Two & Five-Year Rates I I I I FY95-96 FY 96-97 FY97-98 FY98-99 FY99-00 FY95-96 FY96-97 FY97-911 FY98-99 FY99-OQ *Fiscal Year Averages FY99-00 PORTFOLIO ANALYSIS INVESTMENT PORTFOLIO Dollar Amount of Assets (Fiscal Year End) piEiiEq ssso.0 , . S300.0 s250.0 S200.0 s150.0 $100.0 $50.0 so.0 FY85.96 FY96.97 FYII-91 FY99-99 FYBS.00 Total assets in the investment portfolio at the end of the fiscal year stood at $323.3 million. This is an increase of $24.1 million and is again a record amount for the portfolio. Most of this increase in total portfolio assets occurred in the last three months of the fiscal year. Over $41 million of capital expenditures were made in the past fiscal year. There was a limited amount of new cash available for investments. For the most part, investments were made with cash that came from current maturities. Over the past several years, the total value of the portfolio has been increasing at a decreasing rate. Commencing with FY96-year-over-year percentage increases have been 32%, 26%, 19%, and 8%. The City publishes a Comprehensive Annual Financial Report (CAFR) at the end of each fiscal year. Among other information, this report presents a balance sheet showing the total assets owned by the City and all its CASH/INVESTMENTS RELATIVE TO agencies. The cash TOTAL ASSETS OF CITY AND ITS AGENCIES* and investments S700 piziiGq 100% managed by the City S600 60% Treasurer now $500 represent 52% of all s400 60% assets reported by S300 40% the City and its S200 agencies. It should SlOO 20% be noted that so 0% infrastructure assets FY95-96 FY96-97 FY97-98 FY98-99 FY99-00 such as streets, streetlights, *sa.rcc Con,pr~hawc *“““.I Fm..ri.l Report. )I.tr: T”td As,rU of city .nd I” Alrn&. i. .” .st,n*,d .rnO”rnl for FY99.00 sidewalks, curbs, gutters, trees, and medians are not required to be reported in the CAFR. This is expected to change, however. An accounting rule-making body called the Government Accounting Standards Board (GASB) has issued a statement requiring that all infrastructure assets be reported as part of total assets owned. This will take effect for Carlsbad for the CAFR dated June 30, 2002. At that time, cash and investments will comprise a lower percentage of total assets owned. 4 SOURCE OF POOL ASSETS (Dollar Amounts in Millions) 6130199 6/30/00 128.2 118.9 Total Assets - S299.2 Million Total Assets - S323.3 Million The portfolio is an investment pool comprised of inactive cash from the various funds of three agencies: the City, the Water District, and the Redevelopment Agency. The majority of portfolio assets come from the Capital Projects fund ($128.2 million), followed by the Enterprise fund ($98.0 million), and the General fund ($46.1 million). The General fund experienced one of the smaller percentage increases. While the total portfolio increased by $24.1 million, or 8%, the General fund increased by $1.7 million, or 3.8%. The increase in the General fund was smaller than otherwise because over $8.0 million approved by Council was transferred to the Capital Projects fund from the General fund during FY99-00. 5 PORTFOLIO YIELDS * With One Year T-Bill Yields 1 Percent] 6.5 -s 6 i, 5.5 7 ,_..-.-- -----a---- * -..__.__ 1. **-* 5- ---___ _.-- .a__ ._-- 4.5 - -.*- 4- 3.5 - 3 , FY95-96 FY96-97 FY97-98 FY98-99 FY 99-00 FY95-96 FY96-97 FY97-9S FY9S-99 FYYY-00 (J :I:; :::; ;I:; ::;g ::::; The average return of the portfolio increased to 5.81% from 5.71% the year before. The portfolio yield is influenced by in short- changes term market interest rates since approximately 35% of the total investments must mature within one *Fiscal Year Averages year. The average interest rate for one- year U.S. Treasury Bills increased to 5.81% from 4.72%. This increase in interest rates of U. S. Treasury Bills reflects the rapid increase in short-term rates brought about by the Federal Reserve action the past fiscal year. Investments are routinely made in the Local Agency Investment Fund (LAIF), an investment pool managed by the California State Treasurer. The LAIF investment pool is very liquid with average investments maturing in six months City Investments in LAIF provide a YIELD COMPARISON desired measure of PORTFOLIO EX-LAIF VS. LAIF liquidity at attractive JULY 1995 -JUNE 2000 short-term rates, and lPerccntl typically comprise 5% 1 8.4 to 10% of the total 6.2 portfolio. In many 6 respects, City 6.8 investments in LAIF 5.6 are comparable to 5.4 having a checking “‘i ; account that pays Jun-ss 0.5-95 ,un-,s 0.099 .I”“-97 0.s.97 ,un-99 D.C.99 Jun.99 o.s4, Jun.90 interest Des95 1~96 Drc96 Jun 97 kc97 Jun98 Da98 lun 99 Des99 JunOO approximating one- I=:,“=*” ‘T3; ;:;m; y; ym; y; z.9;; y; ;::;; yg ym: 6s;; year rates. City investments other than those in LAIF typically earn 20 to 30 basis points more. In the last three months of the fiscal year, however, the interest rate earned on LAIF investments was approximately the same as the interest rate earned by other portfolio investments. This was caused by four factors: the rapid increase in short-term rates, the short maturities of LAIF investments (LAIF turns over its potiolio in about one-third the time), the inverted yield curve, and the 6 7 relatively small dollar amount of new cash available for City investments. As long as the yield curve is either inverted or flat, interest earned on lAlF investments will approximate the interest rate earned on other investments. At the end of the fiscal year, June 30, 2000, investments other than LAIF exceeded 6% for the first time since December 1995. Historical Unrealized Gains/Losses as Percent of Amortized Cost July 1996 - June 2000 1.50% 1 .OO% 0.50% 0.00% -0.50% -1 .OO% -1 SO% -2.00% _- Jul- Ott- Jan- Apr- Jul- Ott- Jan- Apr- Jul- Ott- Jan- Apr- Jul- Ott- Jan- Apr- 96 96 97 97 97 97 98 98 98 98 99 99 99 99 00 00 All investments held in the portfolio will gain and lose value as market interest rates fall and rise. Accountants refer to these changes in value as unrealized gains and losses. Over the course of the economic cycle, the portfolio is expected to experience unrealized gains and losses that are approximately equal to each other as market interest rates increase and decrease, and as investments are made when cash becomes available. The rapid increases in market interest rates in the past fiscal year allowed City investments to achieve earnings higher than 6% for the first time since December 1995. These same higher market rates, however, caused investments that had been made earlier at lower rates to lose value. The current loss in value is considered to be within an acceptable range of risk. Since investments are held to maturity, none of this loss in value will be realized. The portfolio has performed as designed by the City’s Investment Policy. 7 Cash income from portfolio investments PORTFOLIO CASH INCOME* was $17.0 million in For Fiscal Years Indicated FY99-00. Of this, approximately $2.2 piziiLq $18.0 , 17.02 million was credited to the General fund. $15.0 The General fund $12.0 receives interest $9.0 income to a greater $8.0 degree than its share of the pool $3.0 assets because $0.0 interest not required FY95-96 FY96-97 FY97-98 FY98-99 FY99-00 to be held by other *Commencing with FY97-98, ush income was reduced by purchased mxrued interest. Had this change not occurred, cash income would have been reported as $13.6 million in FY 97-98. funds reverts to the General fund. Cash income is a function of assets in the portfolio, the market interest rates at the time of the investments, and the interest payment schedules of the issues. FYOO-01 PREVIEW National and international economic forces, as well as domestic political considerations, influence market interest rates. On the international level, there remains a considerable amount of unused capacity, and the dollar remains strong. Much domestic demand will continue to absorb low-priced imports, subduing inflationary pressures. Nonetheless, from past actions and pronouncements, the Federal Reserve is determined apparently to slow the overall growth in domestic demand. Growth in retail sales, consumption, and the stock market are leading indicators of future Federal Reserve action regarding interest rates. There has been little or no growth in retail sales in the last three months and the stock market is below what it was on January 1,200O. Inflationary pressures will be subdued. Another important indicator of future Federal Reserve action is the growing federal budget surplus and what the national politicians will do with it. The current political climate is to do nothing with the surplus. If this continues, then by default the surplus will be used to buy down the national debt. This will also subdue inflationary pressures. 4 The Federal Reserve will most likely keep interest rates unchanged until after the election in November. There is significant thought that the stock market holds the key to the Federal Reserve’s next decision. The pace of consumer spending is tied to the wealth created - or lost - in the stock market, and the Federal Reserve apparently is convinced that controlling the pace of spending is the key to controlling inflation. The stock market is likely to resume its rise in the latter half of calendar year 2000, which would indicate that the Federal Reserve may not be through with actions to increase the federal funds target rate. At most, there may be two additional 25 basis point increases from January through June 2001. On balance, these national and international forces will likely cause lower market interest rates in FYOO-01. Short-term interest rates will be lower and the yield curve will become flat. Total assets in the investment portfolio stood at approximately $323 million at the end of FY99-00. This should increase to approximately $360 million by the end of FYOO-01. Assessed property values are forecasted to increase by about 18%, while sales tax revenues and transient occupancy tax revenues are expected to increase by 8% and 1 I%, respectively. Additionally, interest revenue earned from portfolio investments in FYOO-01 will approximate $20 million. With the start of the new fiscal year on July 1, 2000, the required minimum amount of investments maturing within one year increased from $104 million to $117 million. This conforms to the City’s Investment Policy requiring investments maturing within one year to be no less than the approved operating budget. This requirement, together with an inverted or flat yield curve, will cause more investments to be made at the short end. Approximately $88 million of investments with fixed maturity dates will mature in FYOO-01. Proceeds from investments maturing at the beginning of the fiscal year will be reinvested at greater market rates. As the fiscal year progresses, however, market rates will decline and proceeds from maturing investments will be reinvested at essentially the same rates. Additional cash received into the portfolio will be invested at slightly lower rates, and finally, yields on our LAIF investments are expected to be lower. At the end of FY99-00, the total portfolio had a yield of 6.1%, with an average of 5.8% for the entire fiscal year. The average yield for the entire fiscal year ending June 30, 2001 should approximate 6.0%. 9